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Nirmala Sitharaman's Reappointment Signals Policy Continuity and Fiscal Discipline

Modi Reappoints Sitharaman as Finance Minister, Ensuring Policy Continuity and Fiscal Discipline with 5.1% Deficit Target

By Athena Xu

6/10, 23:50 EDT
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Key Takeaway

  • Modi's reappointment of Nirmala Sitharaman as finance minister signals policy continuity, focusing on infrastructure and fiscal conservatism.
  • Analysts expect the government to maintain a fiscal deficit target of 5.1% and possibly achieve a credit rating upgrade within 24 months.
  • Despite robust economic growth, challenges like joblessness persist; Sitharaman's upcoming budget will reveal the coalition's priorities.

Policy Continuity

Indian Prime Minister Narendra Modi's decision to reappoint Nirmala Sitharaman as the country's finance minister is being viewed by market analysts as a strong signal of policy continuity. Sitharaman, who has previously held the finance, trade, and defense portfolios, is seen as a senior and trusted member of Modi's administration. Her reappointment is expected to maintain the focus on infrastructure development and fiscal conservatism.

Goldman Sachs Group Inc. noted, "We expect the new government to stick to the fiscal consolidation path with a continued thrust on infrastructure creation through more rail network, amidst a slight tilt towards more rural spending." The firm highlighted that Modi's party retained 25 out of 30 cabinet appointments, leaving five seats for coalition partners, which bodes well for continuity of reforms.

Nomura Holdings Inc. economist Sonal Varma commented, "Investors were very fearful of the compromises the BJP would have to make after being forced to form a coalition government." However, with Sitharaman's reappointment, the focus on infrastructure and continued fiscal consolidation should persist. Varma added that financial support to states like Andhra Pradesh and Bihar would likely be managed without compromising fiscal discipline.

Fiscal Discipline

Sitharaman's reappointment comes at a time when the government needs to balance fiscal demands in a coalition setup after the Bharatiya Janata Party (BJP) failed to secure a majority in the elections. Economists suggest that the new government may face pressure to boost spending to shore up support, potentially shifting away from its fiscally conservative path.

Sameer Kalra, founder at Target Investing, emphasized the importance of fiscal discipline for the next two budgets, stating, "Markets would react with some level of positivity on it." He also noted the possibility of a credit rating upgrade in the next 24 months, given the positive outlook from rating agencies.

Barclays PLC's Shreya Sodhani, vice president for global research, wrote, "With most ministries, including the top four, unchanged, we expect policy continuity from the new government." Sodhani expects the fiscal deficit target for the financial year ending March to be retained at 5.1%.

Economic Growth and Challenges

India's economy grew more than 8% in the fiscal year that ended in March, making it one of the fastest-growing major economies. The central bank predicts growth will reach 7.2% in the current fiscal year. Despite this robust growth, India faces challenges such as joblessness and rising cost of living, which emerged as major concerns for voters and contributed to the BJP's drop in support at the polls.

Sitharaman's immediate task will be to present the government's budget, likely in July, which will provide insight into the Modi coalition's priorities. A recent boost to government coffers, with tax revenue soaring and the central bank announcing a record dividend of about $25 billion to the government, provides some fiscal space to spend more.

Abheek Barua, chief economist at HDFC Bank, remarked, "She’s a prudent fiscal manager," adding that Sitharaman will ensure India remains on the path of fiscal consolidation. "We can see more allocation towards rural development and rural housing, and she will ensure that it does not translate into any fiscal slippage. It’s very critical at this moment."

Street Views

  • Goldman Sachs Economists, including Santanu Sengupta (Cautiously Optimistic on India's fiscal policy and infrastructure):

    "We expect the new government to stick to the fiscal consolidation path with a continued thrust on infrastructure creation through more rail network, amidst a slight tilt towards more rural spending."

  • Sonal Varma, Nomura Holdings (Cautiously Optimistic on India's infra focus and fiscal consolidation):

    "Investors were very fearful of the compromises the BJP would have to make after being forced to form a coalition government. With Sitharaman’s reappointment, the focus on infra and continued fiscal consolidation should also continue. While Andhra Pradesh and Bihar may get financial support, this will probably be done without compromising on fiscal consolidation."

  • Deven Choksey, DRChoksey FinServ Pvt. (Bullish on Nirmala Sitharaman's reappointment):

    "Nirmala Sitharaman’s reappointment as India’s finance minister in the new coalition government is definitely a wise step for keeping the focus on infrastructure development and exports... She has done a good job of focusing on priorities and has clarity on what needs to be done."

  • Sameer Kalra, Target Investing (Cautiously Optimistic about market reaction):

    "With fiscal discipline a focus for the next two budgets, it was important that there was continuity in the finance ministry. Markets would react with some level of positivity on it... Given rating agencies have turned positive in their outlook, there is a possibility of a rating change in next 24 months."

  • Shreya Sodhani, Barclays PLC (Neutral regarding policy continuity from Modi's government):

    "With most ministries, including the top four unchanged we expect policy continuity from the new government... Investor focus will now move to budget in July where she sees fiscal deficit target for financial year ending March retained at 5.1%"